Treasury urges banks to deploy new government capital

By David Lawder

WASHINGTON (Reuters) - The U.S. Treasury on Monday began taking applications from U.S. banks interested in tapping into the remaining $125 billion in a government equity infusion program, while making clear it wants new capital loaned out -- not hoarded.

Issuing regulatory guidelines for a $250 billion plan created last week to shore up bank balance sheets, Treasury Secretary Henry Paulson said there was interest from a broad group of banks of all sizes.

The Treasury will have the final say on which banks get capital injections from the government in exchange for senior preferred shares, but it will consider a broad range of factors, including an institution's health, lending ability and merger possibilities.

Half of the $250 billion fund has already been committed to nine of the largest U.S. banks, and others interested must apply through their primary regulatory agency by November 14.

Paulson emphasized that the program was designed for healthy institutions, to attract private capital and to encourage lending.

"Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending," Paulson said in a statement.

Participating banks also are expected "to help struggling home owners who can afford their homes avoid foreclosure," Paulson added.

However, a government stake in a bank is no guarantee that the Treasury will rescue the institution from financial trouble.

"An investment doesn't say anything about whether a bank will be allowed to fail," a U.S. government regulatory official told reporters.

NO EXPANSION PLANS

The Treasury has no plans to expand the program beyond $250 billion, even if there is strong demand for government capital. The equity purchase fund was carved out of a $700 billion financial rescue package that was originally focused on purchasing distressed mortgage assets.

Because the injections are limited to 3 percent of "risk-weighted" assets for each institution up to $25 billion, the remaining $125 billion in the purchase fund would be enough for all qualifying, publicly traded institutions, the regulatory official said.

Foreign-controlled banks are not eligible.

The banking industry responded favorably to the additional details laid out on Monday.

"It will make it easier for us as an industry to make decisions for participation," said Wayne Abernathy, a financial policy expert at the American Bankers Association.